What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-31 compared with 2023-06-01 · 242 added, 80 removed, 249 unchanged (56% of the section changed)

11 unchanged sentences

Fiscal 2023 and fiscal 2022 are referred to as "2023," and "2022," respectively.

The first quarter of 2023 and 2022 ended on April 30, 2023 and May 1, 2022, respectively.

The first two quarters of 2023 and 2022 ended on July 30, 2023 and July 31, 2022, respectively.

Components of management's discussion and analysis of financial condition and results of operations include:

1 unchanged sentence

• Quarter-to-Date Results of Operations

• Year-to-Date Results of Operations

• Comparable Store Sales and Total Comparable Sales

16 unchanged sentences

We expect to continue to broaden our merchandise offerings through expansion across these product areas.

To help build our community of guests, and as part of our membership program, we offer in-home connected fitness and associated content subscriptions through lululemon Studio.

Financial Highlights

For the first quarter of 2023, compared to the first quarter of 2022:

For the second quarter of 2023, compared to the second quarter of 2022:

• Net revenue increased 18% to $2.2 billion.

8 unchanged sentences

• Income tax expense increased 30% to $145.0 million.

Our effective tax rate for the first quarter of 2023 was 29.1% compared to 27.0% for the first quarter of 2022.

• Diluted earnings per share were $2.28 compared to $1.48 in the first quarter of 2022.

Our effective tax rate for the second quarter of 2023 was 29.8% compared to 27.9% for the second quarter of 2022.

• Diluted earnings per share were $2.68 compared to $2.26 in the second quarter of 2022.

The second quarter of 2022 included an after-tax gain of $8.5 million from the sale of an administrative office building, which increased diluted earnings per share by $0.06.

Refer to the non-GAAP reconciliation tables contained in the "Non-GAAP Financial Measures" section of this "Item 2.

5 unchanged sentences

Macroeconomic conditions, including foreign currency fluctuations, have impacted our financial results.

Foreign currency fluctuations reduced the growth of our net revenue by $44.6 million when comparing the first quarter of 2023 to 2022 primarily due to the overall appreciation of the US dollar.

Foreign currency fluctuations reduced the growth of our net revenue by $26.5 million when comparing the second quarter of 2023 to 2022 primarily due to the overall appreciation of the US dollar.

We expect that future exchange rate volatility will impact our results.

We have also experienced increased wage rates when comparing the first quarter of 2023 to 2022.

Guest traffic in our company-operated stores and online increased in the first quarter of 2023, compared to the first quarter of 2022.

We have also experienced increased wage rates when comparing the second quarter of 2023 to 2022.

Guest traffic in our company-operated stores and online increased in the second quarter of 2023, compared to the second quarter of 2022.

Consumer purchasing behaviors may be impacted by current economic conditions including inflation, higher interest rates, and other macroeconomic factors which may have an adverse effect on our future operating margins.

2 unchanged sentences

This supply chain disruption caused us to use higher cost modes of transport, including increasing our use of air freight.

We have seen an improvement in the supply chain disruption during the second half of 2022 and the first quarter of 2023, including reductions in freight costs and reductions in our levels of air freight usage.

In the first quarter of 2023 compared to the first quarter of 2022 our product margin increased by 430 basis points, primarily due to lower air freight costs from rate reductions and reduced usage.

We expect that we will see improved product margin in the first half of 2023 compared to the prior year.

We have seen an improvement in the supply chain disruption during the second half of 2022 and the first two quarters of 2023, including reductions in freight costs and reductions in our levels of air freight usage.

In the second quarter of 2023 compared to the second quarter of 2022 our product margin increased by 330 basis points, primarily due to lower air freight costs from rate reductions and reduced usage.

We expect that we will see higher product margin throughout 2023 compared to 2022, with the increase moderating in the second half of 2023.

COVID-19 Pandemic

Most of our retail locations were open throughout the first quarter of 2023 and 2022, with certain locations temporarily closed due to COVID-19 resurgences during the first quarter of 2022, including certain closures in the People's Republic of China ("PRC"), including the Company's third party distribution center.

Net revenue from the PRC increased 79% in the first quarter of 2023 compared to the first quarter of 2022, with improvements in COVID-19 trading conditions contributing to this increase.

Most of our retail locations were open throughout the first two quarters of 2023 and 2022, with certain locations temporarily closed due to COVID-19 resurgences during the first quarter of 2022, including certain company-operated stores and our third party distribution center in the People's Republic of China ("PRC").

Net revenue from the PRC increased 61% in the second quarter of 2023 compared to the second quarter of 2022, with improvements in COVID-19 trading conditions contributing to this increase.

Seasonal COVID-19 resurgences could impact our operations and financial performance in our key markets.

Quarter-to-Date Results of Operations:

First Quarter Results

Second Quarter Results

The following table summarizes key components of our results of operations for the periods indicated:

First Quarter

Second Quarter

2023 2022 2023 2022

5 unchanged sentences

Amortization of intangible assets 1,879 2,195 0.1 0.1

Gain on disposal of assets — (10,180) — (0.5)

Income from operations 479,257 401,208 21.7 21.5

3 unchanged sentences

Net income $ 341,603 $ 289,521 15.5 % 15.5 %

Net revenue increased $387.3 million, or 24%, to $2.0 billion for the first quarter of 2023 from $1.6 billion for the first quarter of 2022.

On a constant dollar basis, assuming the average foreign currency exchange rates for the first quarter of 2023 remained constant with the average foreign currency exchange rates for the first quarter of 2022, net revenue increased $432.0 million, or 27%.

Net revenue increased $340.8 million, or 18%, to $2.2 billion for the second quarter of 2023 from $1.9 billion for the second quarter of 2022.

On a constant dollar basis, assuming the average foreign currency exchange rates for the second quarter of 2023 remained constant with the average foreign currency exchange rates for the second quarter of 2022, net revenue increased $367.3 million, or 20%.

The increase in net revenue was primarily due to increased company-operated store net revenue, including from new company-operated stores and increased comparable store sales, as well as due to increased direct to consumer net revenue.

Other net revenue also increased.

Total comparable sales, which includes comparable store sales and direct to consumer net revenue, increased 14% for the first quarter of 2023 compared to the first quarter of 2022.

Total comparable sales, which includes comparable store sales and direct to consumer net revenue, increased 11% for the second quarter of 2023 compared to the second quarter of 2022.

Total comparable sales increased 13% on a constant dollar basis.

Net revenue for the first quarter of 2023 and 2022 is summarized below.

First Quarter

Net revenue for the second quarter of 2023 and 2022 is summarized below.

Second Quarter

2023 2022 2023 2022 Year over year change

5 unchanged sentences

Company-Operated Stores.

The increase in net revenue from our company-operated stores was driven by net revenue from company-operated stores that we opened or significantly expanded since the first quarter of 2022 which contributed $137.9 million.

We have opened 83 net new company-operated stores since the first quarter of 2022, including 39 stores in Asia Pacific, 37 stores in North America, and seven stores in Europe.

The increase in net revenue from our company-operated stores was driven by net revenue from company-operated stores that we opened or significantly expanded since the second quarter of 2022 which contributed $141.0 million to the increase.

We have opened 72 net new company-operated stores since the second quarter of 2022, including 36 stores in Asia Pacific, 30 stores in North America, and six stores in Europe.

The increase in net revenue from our company-operated stores was also driven by increased comparable store sales.

Comparable store sales increased 7%, or 9% on a constant dollar basis.

The increase in comparable store sales was primarily a result of increased store traffic, partially offset by a decrease in conversion rates.

Dollar value per transaction was consistent year over year.

The increase in comparable store sales was primarily a result of increased store traffic, partially offset by a decrease in conversion rates and a lower dollar value per transaction.

Direct to Consumer.

1 unchanged sentence

The increase in net revenue from our direct to consumer segment was primarily a result of increased traffic, partially offset by a decrease in conversion rates and a lower dollar value per transaction.

The increase in other net revenue was primarily due to increased outlet sales, license and supply arrangement revenue, sales to wholesale accounts, and recommerce revenue.

The increase in net revenue was partially offset by a

decrease in net revenue from our temporary locations, which had fewer locations open compared to the prior year, and lululemon Studio.

First Quarter

The increase in other net revenue was primarily due to increased outlet sales, sales to wholesale accounts, and license and supply arrangement revenue.

The increase in net revenue was partially offset by a decrease in net revenue from our temporary locations, which had fewer locations open compared to the prior year, and a decrease in lululemon Studio net revenue.

Second Quarter

2023 2022 Year over year change

3 unchanged sentences

The increase in gross margin was primarily the result of:

• a net increase in product margin of 330 basis points, primarily due to lower air freight costs from rate reductions and reduced usage, modestly offset by higher damages and inventory provisions in the current year.

The increase in product margin was partially offset by:

• an increase in costs related to our product departments and distribution centers as a percentage of net revenue of 50 basis points;

• an unfavorable impact of foreign currency exchange rates of 30 basis points;

• an increase in occupancy costs as a percentage of net revenue of 20 basis points.

Selling, General and Administrative Expenses

Second Quarter

2023 2022 Year over year change

(In thousands) (In thousands) (Percentage)

Selling, general and administrative expenses

$ 817,375 $ 662,253 $ 155,122 23.4 %

Selling, general and administrative expenses as a percentage of net revenue

37.0 % 35.4 % 160 basis points

The increase in selling, general and administrative expenses was primarily due to:

• an increase in head office costs of $92.9 million, comprised of:

– an increase in employee costs of $32.3 million primarily due to increased salaries and wages expense as well as increased incentive compensation and stock-based compensation, primarily as a result of headcount growth and increased wage rates;

– an increase in brand and community costs of $24.3 million primarily due to increased marketing expenses;

– an increase in technology costs, including cloud computing amortization, of $12.9 million;

– an increase in depreciation of $12.4 million;

– an increase in other head office costs of $11.0 million, including due to increased professional fees.

• an increase in costs related to our operating channels of $72.4 million, comprised of:

– an increase in employee costs of $38.2 million primarily due to increased salaries and wages expense, incentive compensation, and benefit costs in our company-operated stores channel, primarily from the growth in our business and increased wage rates;

– an increase in other operating costs of $17.8 million primarily due to increased depreciation, technology costs, and repairs and maintenance costs;

– an increase in variable costs of $10.5 million primarily due to increased credit card fees, packaging costs, and distribution costs, primarily as a result of increased net revenue;

– an increase in brand and community costs of $5.9 million primarily due to increased digital marketing expenses related to our direct to consumer channel.

The increase in selling, general and administrative expenses was partially offset by a decrease in net foreign currency exchange and derivative revaluation losses of $10.2 million.

Amortization of Intangible Assets

Second Quarter

2023 2022 Year over year change

(In thousands) (In thousands) (Percentage)

Amortization of intangible assets

$ 1,879 $ 2,195 $ (316) (14.4) %

The amortization of intangible assets was primarily the result of the amortization of intangible assets recognized upon the acquisition of MIRROR.

Gain on Disposal of Assets

Second Quarter

2023 2022 Year over year change

(In thousands) (In thousands) (Percentage)

Gain on disposal of assets

$ — $ (10,180) $ 10,180 (100.0) %

During the second quarter of 2022, we completed the sale of an administrative office building, which resulted in a pre-tax gain of $10.2 million.

Income from Operations

On a segment basis, we determine income from operations without taking into account our general corporate expenses and certain other expenses.

Segmented income from operations is summarized below.

Second Quarter

2023 2022 2023 2022 Year over year change

(In thousands) (Percentage of net revenue of respective operating segment) (In thousands) (Percentage)

Segmented income from operations:

Company-operated stores $ 339,692 $ 256,807 31.0 % 28.4 % $ 82,885 32.3 %

Direct to consumer 383,870 326,423 43.0 42.1 57,447 17.6

Other 48,683 29,626 22.3 15.6 19,057 64.3

$ 772,245 $ 612,856 $ 159,389 26.0 %

General corporate expense 291,109 219,633 71,476 32.5

Amortization of intangible assets 1,879 2,195 (316) (14.4)

Gain on disposal of assets — (10,180) 10,180 (100.0)

Income from operations $ 479,257 $ 401,208 $ 78,049 19.5 %

Operating margin 21.7 % 21.5 % 20 basis points

Company-Operated Stores .

The increase in income from operations from our company-operated stores was primarily the result of increased gross profit of $131.7 million, driven by increased net revenue and higher gross margin.

The increase in gross margin was primarily due to higher product margin driven by lower air freight costs and lower markdowns, partially offset by higher damages and inventory provisions.

The increase in gross margin was partially offset by an unfavorable impact of foreign currency exchange rates and deleverage in costs from our distribution centers and product teams.

The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, primarily due to higher employee and operating costs.

Employee costs increased primarily due to higher salaries and wages expense, incentive compensation, and benefit costs as a result of the growth in our business and increased wage rates.

Store operating costs

increased primarily due to increases in credit card fees and packaging costs, as a result of higher net revenue, as well as increased repairs and maintenance.

Income from operations as a percentage of company-operated stores net revenue increased due to higher gross margin, partially offset by deleverage on selling, general and administrative expenses.

Direct to Consumer.

The increase in income from operations from our direct to consumer segment was primarily the result of increased gross profit of $94.9 million, driven by increased net revenue and higher gross margin.

The increase in gross margin was primarily due to higher product margin driven by lower air freight costs, partially offset by higher markdowns and higher damages.

The increase in gross margin was partially offset by an unfavorable impact of foreign currency exchange rates and deleverage in costs from our distribution centers and product teams.

The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, primarily due to higher digital marketing expenses, higher depreciation costs, higher variable operating costs including distribution costs, credit card fees, and packaging costs, as a result of higher net revenue, as well as higher technology costs.

Income from operations as a percentage of direct to consumer net revenue increased primarily due to higher gross margin, partially offset by deleverage on selling, general and administrative expenses.

The increase in income from operations from our other channels was primarily the result of increased gross profit of $16.4 million, driven by increased net revenue and higher gross margin.

The increase in income from operations from our other channels was also due to decreased selling, general and administrative expenses driven by reduced lululemon Studio marketing expenses, partially offset by higher salaries and wages expense.

Income from operations as a percentage of other net revenue increased primarily due to leverage on selling, general and administrative expenses and higher gross margin.

General Corporate Expense.

The increase in general corporate expense was primarily due to increased employee costs, primarily from headcount growth and increased wage rates, as well as increased brand and community costs, technology costs, depreciation, and professional fees.

The increase in general corporate expense was partially offset by a decrease in net foreign currency exchange and derivative revaluation losses of $10.2 million.

Other Income (Expense), Net

Second Quarter

2023 2022 Year over year change

(In thousands) (In thousands) (Percentage)

Other income (expense), net

$ 7,362 $ 145 $ 7,217 n/a

The increase in other income, net was primarily due to an increase in interest income as a result of higher interest rates and higher cash balances.

Income Tax Expense

Second Quarter

2023 2022 Year over year change

(In thousands) (In thousands) (Percentage)

Income tax expense

$ 145,016 $ 111,832 $ 33,184 29.7 %

Effective tax rate

29.8 % 27.9 % 190 basis points

The increase in the effective tax rate was primarily due to the accrual of withholding taxes on unremitted foreign earnings and an increase in non-deductible expenses in international jurisdictions.

A lower tax rate on the capital gain on the sale of an administrative building reduced our effective tax rate in the second quarter of 2022 by 30 basis points.

Second Quarter

2023 2022 Year over year change

(In thousands) (In thousands) (Percentage)

$ 341,603 $ 289,521 $ 52,082 18.0 %

The increase in net income was primarily due to an increase in gross profit of $243.0 million and an increase in other income (expense), net of $7.2 million, partially offset by an increase in selling, general and administrative expenses of $155.1 million, an increase in income tax expense of $33.2 million, and a gain on disposal of assets of $10.2 million in the prior year.

Year-to-Date Results of Operations:

First Two Quarters Results

The following table summarizes key components of our results of operations for the periods indicated:

First Two Quarters

2023 2022 2023 2022

(In thousands) (Percentages)

Net revenue $ 4,209,957 $ 3,481,791 100.0 % 100.0 %

Cost of goods sold 1,760,641 1,555,922 41.8 44.7

Gross profit 2,449,316 1,925,869 58.2 55.3

Selling, general and administrative expenses 1,564,888 1,270,104 37.2 36.5

Amortization of intangible assets 3,757 4,390 0.1 0.1

Gain on disposal of assets — (10,180) — (0.3)

Income from operations 880,671 661,555 20.9 19.0

Other income (expense), net 15,387 123 0.4 —

Income before income tax expense 896,058 661,678 21.3 19.0

Income tax expense 264,050 182,159 6.3 5.2

Net income $ 632,008 $ 479,519 15.0 % 13.8 %

Net revenue increased $728.2 million, or 21%, to $4.2 billion for the first two quarters of 2023 from $3.5 billion for the first two quarters of 2022.

On a constant dollar basis, assuming the average foreign currency exchange rates for the first two quarters of 2023 remained constant with the average foreign currency exchange rates for the first two quarters of 2022, net revenue increased $799.3 million, or 23%.

Other net revenue also increased.

Total comparable sales, which includes comparable store sales and direct to consumer net revenue, increased 13% for the first two quarters of 2023 compared to the first two quarters of 2022.

Total comparable sales increased 15% on a constant dollar basis.

Net revenue for the first two quarters of 2023 and 2022 is summarized below.

First Two Quarters

2023 2022 2023 2022 Year over year change

(In thousands) (Percentages) (In thousands) (Percentage)

Company-operated stores $ 2,055,026 $ 1,634,681 48.8 % 46.9 % $ 420,345 25.7 %

Direct to consumer 1,728,615 1,496,678 41.1 43.0 231,937 15.0

Other 426,316 350,432 10.1 10.1 75,884 21.7

Net revenue $ 4,209,957 $ 3,481,791 100.0 % 100.0 % $ 728,166 20.9 %

Company-Operated Stores .

We have opened 72 net new company-operated stores since the second quarter of 2022, including 36 stores in Asia Pacific, 30 stores in North America, and six stores in Europe.

The increase in net revenue from our company-operated stores was also driven by increased comparable store sales.

Comparable store sales increased 10%, or 12% on a constant dollar basis.

The increase in comparable store sales was primarily a result of increased store traffic, partially offset by a decrease in conversion rates and a lower dollar value per transaction.

Direct to Consumer.

Direct to consumer net revenue increased 15%, or 17% on a constant dollar basis.

The increase in other net revenue was primarily due to increased outlet sales, license and supply arrangement revenue, and sales to wholesale accounts.

First Two Quarters

2023 2022 Year over year change

(In thousands) (In thousands) (Percentage)

$ 2,449,316 $ 1,925,869 $ 523,447 27.2 %

58.2 % 55.3 % 290 basis points

The increase in gross margin was primarily the result of:

• a net increase in product margin of 370 basis points, primarily due to lower air freight costs from rate reductions and reduced usage, modestly offset by higher inventory provisions in the current year.

• a decrease in occupancy and depreciation costs as a percentage of net revenue of 10 basis points, driven primarily by the increase in net revenue.

The increase in gross margin was partially offset by an unfavorable impact of foreign currency exchange rates of 50 basis points, and an increase in costs related to our product departments and distribution centers as a percentage of net revenue of 30 basis points.

The increase in product margin was partially offset by:

• an increase in costs related to our product departments and distribution centers as a percentage of net revenue of 40 basis points;

• an unfavorable impact of foreign currency exchange rates of 40 basis points.

Selling, General and Administrative Expenses

First Quarter

First Two Quarters

2023 2022 Year over year change

6 unchanged sentences

• an increase in head office costs of $168.6 million, comprised of:

– an increase of $45.5 million primarily due to an increase in depreciation of $14.8 million, increased brand and community costs, including charitable donations, of $12.6 million, increased technology costs, including cloud computing amortization, of $11.0 million, as well as professional fees;

– an increase in employee costs of $33.8 million primarily due to an increase in salaries and wages of $18.9 million and increased incentive compensation and stock-based compensation of $8.1 million, primarily as a result of headcount growth and increased wage rates, as well as increased benefit costs and travel costs.

– an increase in employee costs of $63.2 million primarily due to increased salaries and wages expense as well as increased incentive compensation and stock-based compensation, primarily as a result of headcount growth and increased wage rates;

– an increase in brand and community costs of $36.9 million primarily due to increased marketing expenses as well as increased donations;

– an increase in depreciation of $27.2 million;

– an increase in technology costs, including cloud computing amortization, of $23.9 million;

– an increase in other head office costs of $17.4 million, including due to increased professional fees.

• an increase in costs related to our operating channels of $137.7 million, comprised of:

– an increase in employee costs of $34.4 million primarily due to an increase in salaries and wages expense and incentive compensation in our company-operated stores channel, primarily from the growth in our business and increased wage rates;

– an increase in variable costs of $13.7 million primarily due to an increase in credit card fees, distribution costs, and packaging costs, primarily as a result of increased net revenue;

– an increase in other costs of $8.2 million primarily due to increased technology costs, professional fees, and repairs and maintenance costs;

– an increase in brand and community costs of $5.3 million primarily due to an increase in digital marketing expenses related to our direct to consumer channel, partially offset by a decrease in marketing expenses related to lululemon Studio.

– an increase in employee costs of $75.5 million primarily due to increased salaries and wages expense, incentive compensation, and benefit costs in our company-operated stores channel, primarily from the growth in our business and increased wage rates;

– an increase in other operating costs of $26.6 million primarily due to increased depreciation costs, technology costs, and repairs and maintenance costs;

– an increase in variable costs of $24.4 million primarily due to increased credit card fees, packaging costs, and distribution costs, primarily as a result of increased net revenue;

– an increase in brand and community costs of $11.2 million primarily due to increased digital marketing expenses related to our direct to consumer channel.

The increase in selling, general and administrative expenses was partially offset by a decrease in net foreign currency exchange and derivative revaluation losses of $11.5 million.

Amortization of Intangible Assets

First Quarter

First Two Quarters

2023 2022 Year over year change

3 unchanged sentences

The amortization of intangible assets was primarily the result of the amortization of intangible assets recognized upon the acquisition of MIRROR.

Gain on Disposal of Assets

First Two Quarters

2023 2022 Year over year change

(In thousands) (In thousands) (Percentage)

Gain on disposal of assets

$ — $ (10,180) $ 10,180 (100.0) %

During the second quarter of 2022, we completed the sale of an administrative office building, which resulted in a pre-tax gain of $10.2 million.

Income from Operations

1 unchanged sentence

Segmented income from operations is summarized below.

First Quarter

First Two Quarters

2023 2022 2023 2022 Year over year change

7 unchanged sentences

Amortization of intangible assets 3,757 4,390 (633) (14.4)

Gain on disposal of assets — (10,180) 10,180 (100.0)

Income from operations $ 880,671 $ 661,555 $ 219,116 33.1 %

3 unchanged sentences

The increase in gross margin was primarily due to higher product margin driven by lower air freight costs and lower markdowns, partially offset by higher inventory provisions.

The increase in gross margin was also due to leverage on occupancy and depreciation costs, partially offset by an unfavorable impact of foreign currency exchange rates and deleverage in costs from our distribution centers and product teams.

The increase in gross margin was also due to leverage on occupancy costs and depreciation costs, partially offset by an unfavorable impact of foreign currency exchange rates and deleverage in costs from our distribution centers and product teams.

The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, primarily due to higher employee and operating costs.

Employee costs increased primarily due to higher salaries and wages expense and higher incentive compensation as a result of the growth in our business and increased wage rates.

Store operating costs increased primarily due to increases in credit card fees, packaging costs, and distribution costs, as a result of higher net revenue, as well as increased repairs and maintenance.

Income from operations as a percentage of company-operated stores net revenue increased due to higher gross margin and leverage on selling, general and administrative expenses.

Store operating costs increased primarily due to increases in credit card fees and packaging costs as a result of higher net revenue, as well as increased repairs and maintenance.

Income from operations as a percentage of company-operated stores net revenue increased due to higher gross margin.

Direct to Consumer.

The increase in income from operations from our direct to consumer segment was primarily the result of increased gross profit of $205.9 million, driven by increased net revenue and higher gross margin.

The increase in gross margin was primarily due to higher product margin driven by lower air freight costs, partially offset by higher inventory provisions.

The increase in gross margin was primarily due to higher product margin driven by lower air freight costs, partially offset by higher markdowns and higher inventory provisions.

The increase in gross margin was partially offset by an unfavorable impact of foreign currency exchange rates and deleverage in costs from our distribution centers and product teams.

The increase in gross profit was partially offset by an increase in selling, general and administrative expenses, primarily due to higher variable operating costs including distribution costs, packaging costs, and credit card fees, as a result of higher net revenue, as well as higher digital marketing expenses and technology costs.

Income from operations as a percentage of direct to consumer net revenue increased primarily due to higher gross margin.

The increase in income from operations from our other channels was primarily the result of increased operating profit from our other lululemon retail operations and a reduction in lululemon Studio marketing expenses.

Increased net

revenue from outlets, license and supply arrangements, sales to wholesale accounts, and recommerce resulted in increased gross profit.

This was partially offset by a decrease in net revenue from our temporary locations and lululemon Studio.

Selling, general and administrative expenses decreased primarily due to lower lululemon Studio marketing costs.

Income from operations as a percentage of other net revenue increased primarily due to leverage on selling, general and administrative expenses, partially offset by lower gross margin driven by higher markdowns.

The increase in gross profit was partially offset by an increase in selling, general and administrative expenses primarily due to higher digital marketing expenses, higher variable operating costs including distribution costs, credit card fees, and packaging costs as a result of higher net revenue, as well as higher depreciation costs, and higher technology costs.

The increase in income from operations from our other channels was primarily the result of increased gross profit of $36.1 million, driven by increased net revenue.

Income from operations as a percentage of other net revenue increased primarily due to leverage on selling, general and administrative expenses.

General Corporate Expense.

The increase in general corporate expense was primarily due to increased employee costs, primarily from headcount growth and increased wage rates, as well as increased depreciation, brand and community costs, technology costs, and professional fees.

The increase in general corporate expense was primarily due to increased employee costs, primarily from headcount growth and increased wage rates, as well as increased brand and community costs, depreciation, technology costs, and professional fees.

The increase in general corporate expense was partially offset by a decrease in net foreign currency exchange and derivative revaluation losses of $11.5 million.

Other Income (Expense), Net

First Quarter

First Two Quarters

2023 2022 Year over year change

4 unchanged sentences

Income Tax Expense

First Quarter

First Two Quarters

2023 2022 Year over year change

4 unchanged sentences

29.5 % 27.5 % 200 basis points

The effective tax rate for the first quarter of 2023 has increased compared to the first quarter of 2022 primarily due to the accrual of withholding taxes on unremitted foreign earnings and a decrease in deductions related to stock-based compensation.

The increase in the effective tax rate was primarily due to the accrual of withholding taxes on unremitted foreign earnings and a decrease in deductions related to stock-based compensation.

This was partially offset by a reduction in non-deductible expenses in international jurisdictions.

First Quarter

A lower tax rate on the capital gain on the sale of an administrative building reduced our effective tax rate in the first two quarters of 2022 by 20 basis points.

First Two Quarters

2023 2022 Year over year change

1 unchanged sentence

$ 632,008 $ 479,519 $ 152,489 31.8 %

The increase in net income was primarily due to an increase in gross profit of $280.4 million and an increase in other income (expense), net of $8.0 million, partially offset by an increase in selling, general and administrative expenses of $139.7 million and an increase in income tax expense of $48.7 million.

The increase in net income was primarily due to an increase in gross profit of $523.4 million and an increase in other income (expense), net of $15.3 million, partially offset by an increase in selling, general and administrative expenses of $294.8 million, an increase in income tax expense of $81.9 million, and a gain on disposal of assets of $10.2 million in the prior year.

Comparable Store Sales and Total Comparable Sales

4 unchanged sentences

Net revenue from a store is included in comparable store sales beginning with the first fiscal month for which the store has a full fiscal month of sales in the prior year.

Comparable store sales exclude sales from new stores that have not been open for at least 12 full fiscal months, from stores which have not been in their significantly expanded space for at least 12 full fiscal months, and from stores which have been temporarily

relocated for renovations or temporarily closed.

Comparable store sales also exclude sales from direct to consumer and our other operations, as well as sales from company-operated stores that have closed.

14 unchanged sentences

The below changes in net revenue show the change compared to the corresponding period in the prior year.

First Quarter 2023

(In thousands) (Percentages)

Second Quarter 2023

First Two Quarters 2023

Net Revenue Net Revenue

(In thousands) (Percentages) (In thousands) (Percentages)

Change $ 340,837 18 % $ 728,166 21 %

3 unchanged sentences

The below changes in total comparable sales, comparable store sales, and direct to consumer net revenue show the change compared to the corresponding period in the prior year.

First Quarter 2023

Second Quarter 2023

First Two Quarters 2023

Total Comparable Sales (1),(2)

Comparable Store Sales (2)

Direct to Consumer Net Revenue Total Comparable Sales (1),(2)

Comparable Store Sales (2)

Direct to Consumer Net Revenue

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The following table summarizes our net cash flows provided by and used in operating, investing, and financing activities for the periods indicated:

First Quarter

First Two Quarters

2023 2022 Year over year change

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Financing activities (305,651) (384,576) 78,925

Effect of foreign currency exchange rate changes on cash 3,855 (6,711) 10,566

Effect of foreign currency exchange rate changes on cash and cash equivalents 19,761 (5,902) 25,663

Increase (decrease) in cash and cash equivalents $ (47,337) $ (761,040) $ 713,703

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The increase in cash provided by operating activities was primarily as a result of:

• an increase in cash flows from the changes in operating assets and liabilities of $156.1 million, primarily driven by changes in inventories and accounts payable, partially offset by changes in accrued liabilities;

• an increase in cash flows from the changes in operating assets and liabilities of $426.1 million, primarily driven by changes in inventories and accounts payable, partially offset by changes in income taxes;

• increased net income of $152.5 million;

• changes in adjusting items of $32.2 million, primarily driven by increased depreciation and higher cash inflows related to derivatives not designated in a hedging relationship.

• changes in adjusting items of $89.2 million, primarily driven by increased depreciation and higher cash inflows related to derivatives.

Investing Activities

The increase in cash used in investing activities was primarily due to increased capital expenditures and the settlement of net investment hedges.

The increase in capital expenditures was primarily due to an increase in company-operated store expenditures driven by opening new stores and remodeling existing stores as well as increased investment in our new and existing distribution facilities.

There has also been an increase in direct to consumer expenditures driven by investment in our distribution centers as well as other technology infrastructure and system initiatives.

Corporate expenditures also increased driven by investment in technology and business systems and increased expenditures on corporate office renovations.

The increase in capital expenditures was primarily due to investment in our distribution centers as well as technology infrastructure and digital investments.

Company-operated store expenditures also contributed to the increase driven by opening new stores and remodeling existing stores.

Financing Activities

The decrease in cash used in financing activities was primarily the result of a decrease in our stock repurchases.

During the first quarter of 2023, 0.3 million shares were repurchased at a total cost including commissions and excise taxes of $98.5 million.

During the first quarter of 2022, 0.7 million shares were repurchased at a total cost including commissions of $232.6

During the first two quarters of 2023, 0.8 million shares were repurchased at a total cost including commissions and excise taxes of $292.0 million.

During the first two quarters of 2022, 1.1 million shares were repurchased at a total cost including commissions of $358.0 million.

The common stock was repurchased in the open market at prevailing market prices, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934, with the timing and actual number of shares repurchased depending upon market conditions, eligibility to trade, and other factors.

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Risk Factors".

In addition, we may make discretionary capital improvements with respect to our stores, distribution facilities, headquarters, or systems, or we may repurchase shares under an approved stock repurchase program, which we would expect to fund through the use of cash, issuance of debt or equity securities or other external financing sources to the extent we were unable to fund such expenditures out of our cash and cash equivalents and cash generated from operations.

debt or equity securities or other external financing sources to the extent we were unable to fund such expenditures out of our cash and cash equivalents and cash generated from operations.

The following table includes certain measures of our liquidity:

April 30, 2023

July 30, 2023

(In thousands)

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We enter into standby letters of credit to secure certain of our obligations, including leases, taxes, and duties.

As of April 30, 2023, letters of credit and letters of guarantee totaling $10.0 million had been issued, including $6.5 million under our committed revolving credit facility.

As of July 30, 2023, letters of credit and letters of guarantee totaling $10.2 million had been issued, including $6.4 million under our committed revolving credit facility.

Our committed North America credit facility provides for $400.0 million in commitments under an unsecured five-year revolving credit facility.

The credit facility has a maturity date of December 14, 2026, subject to extension under certain circumstances.

As of April 30, 2023, aside from letters of credit of $6.5 million, we had no other borrowings outstanding under this credit facility.

As of July 30, 2023, aside from letters of credit of $6.4 million, we had no other borrowings outstanding under this credit facility.

Further information regarding our credit facilities and associated covenants is outlined in Note 4.

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The timing and cost of our inventory purchases will vary depending on a variety of factors such as revenue growth, assortment and purchasing decisions, product costs including freight and duty, and the availability of production capacity and speed.

Our inventory balance as of April 30, 2023 was $1.6 billion, an increase of 24% from May 1, 2022.

Our inventory balance as of July 30, 2023 was $1.7 billion, an increase of 14% from July 31, 2022.

Critical Accounting Policies and Estimates

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Operating Locations

Our company-operated stores by country as of April 30, 2023 and January 29, 2023 are summarized in the table below.

Number of company-operated stores by country (market) April 30,

Our company-operated stores by country as of July 30, 2023 and January 29, 2023 are summarized in the table below.

Number of company-operated stores by country (market) July 30,

2023 January 29,

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Total company-operated stores 672 655

(1) PRC included 101 stores in China Mainland, nine stores in Hong Kong Special Administrative Region, seven stores in Taiwan, and two stores in Macao Special Administration Region, as of April 30, 2023.

(1) PRC included 107 stores in China Mainland, nine stores in Hong Kong Special Administrative Region, eight stores in Taiwan, and two stores in Macao Special Administration Region, as of July 30, 2023.

As of January 29, 2023, there were 99 stores in China Mainland, nine stores in Hong Kong Special Administrative Region, seven stores in Taiwan, and two stores in Macao Special Administration Region.

Retail locations operated by third parties under license and supply arrangements are not included in the above table.

As of April 30, 2023, there were 26 licensed locations, including 12 in Mexico, seven in the United Arab Emirates, three in Qatar, three in Saudi Arabia, and one in Kuwait.

As of July 30, 2023, there were 29 licensed locations, including 12 in Mexico, six in the United Arab Emirates, five in Saudi Arabia, three in Qatar, two in Kuwait, and one in Israel.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis